Climate Scenarios

The Climate Scenarios research programme has two goals: the first is to complement existing benchmark climate scenarios created by international bodies such as the Intergovernmental Panel on Climate Change or the Network for the Greening of the Financial Sector, or by private bodies such as Oxford Economics. It does so by attaching probabilities to different climate outcomes, thereby providing a science-based assessment of what ensemble of paths is possible, likely or unlikely. We arrive at these probabilities by taking into account and quantifying model uncertainty (as in the case of climate models), structural uncertainty (as for economic growth), and policy uncertainty (by making use of the disconnect between promised policies and observed actions).

The second goal is to complement the existing scenarios and explore the creation of original scenarios in addition to those already distributed by public and private bodies. The extension of existing scenarios aims to complement them with relevant granular geo-sectoral information for asset risk assessment. The exploration of original scenarios aims to consider the narrative aspect and to integrate the full joint distribution for quantities such as horizon temperature (damages) and economic output.

The main users of these probability-aware scenarios will be:

• policy makers, who can focus on the climate outcomes of greater likelihood, while keeping `tail events’ in sight;
• investors, who need the probabilities to compute the expectations of discounted cashflows that are at the heart of all asset-pricing models;
• asset owners, who want to understand the vulnerability of the climate-sensitive assets underlying their financial instruments, either as collateral (eg, for mortgages) or as cash-generators (eg, in infrastructure); and
• concerned citizens, who need to know where the real climate dangers really lie.

Beyond global equity valuation, investors increasingly require not just temporal insights but also region- and sector-specific solutions. Our programme gives explicit attention to deploying and improving the regional and sectoral granularity of these same scenarios; for both transition and physical risks; with the long-term ambition to investigate their effects all the way down to the corporate industry and the performance of individual stocks (granular equity valuation). There is a need to refine contemporaneous models such that they integrate obvious geographic variations more in the occurrence and likelihood of climate change, while also highlighting the heterogenous distribution of its future impacts across industries.

The programme is a joint collaboration between EDHEC Climate Institute and two key companion EDHEC ventures: Scientific Portfolio and Scientific Climate Ratings.

Its work links directly with the Physical Risks research programme. 

Key publications

• How Does Climate Risk Affect Global Equity Valuations? A Novel Approach
• Climate Scenario Analysis and Stress Testing for Investors: A Probabilistic Approach
• Portfolio Losses from Climate Damages: A Guide for Long-Term Investors

The experts

• Riccardo Rebonato, Senior Advisor
• Nicolas Schneider, Senior Research Engineer - Macroeconomist
• Lionel Melin, Associate Researcher
• Fangyuan Zhang, Senior Research Engineer